No-Load Mutual Funds – What Is This No Transaction Fee Investment?
The first modern mutual fund was launched in 1924, offering investors a simple new way to diversify their investment portfolios. Fast forward nearly a century and there are more than 7,500 mutual funds to choose from, each with its own investment objectives and fee structure.
Over time, mutual funds have evolved and different categories have earned names of their own.
The no-load mutual fund is one such style of fund. Investors are attracted to these funds because they don’t come with sales charges that can cut deep gashes in returns. But are they really all they’re cracked up to be?
What Are No-Load Mutual Funds?
Like all other mutual funds, no-load mutual funds are products offered by investment companies that pool money from a large group of investors. That money is then used to invest according to the fund’s prospectus, and investors share in both the price appreciation and dividends the underlying investments generate.
No-load funds can be passively managed index funds or actively managed funds. Their portfolios generally include an allocation to a highly diversified group of securities like stocks, bonds, and exchange-traded funds (ETFs).
What makes these funds special is the absence of sales charges, also known as load fees, which are charged when you buy (front-end load) or sell (back-end load) a mutual fund.
This is unlike other types of mutual funds like front-end load funds, which charge sales commissions when the investment is made, and back-end load funds that charge commissions when the fund is cashed out.
How No-Load Mutual Funds Work
Like all mutual funds, no-load mutual funds collect investments from a large number of investors and use the money they’ve collected to invest according to their prospectus. The key difference in how these funds work is in the fees.
No-load funds don’t come with sales loads, but that doesn’t mean the funds are free. Fund managers and other financial professionals must be paid for their time.
According to the United States Securities and Exchange Commission, investors should look for the following types of fees:
- Redemption Fees. Fees some mutual funds charge when investors sell shares.
- Purchase Fees. Fees some mutual funds charge when investors purchase shares.
- Exchange Fees. Exchange fees are charged by some mutual fund providers when shareholders exchange shares from one fund to shares of another by the same provider.
- Account Fees. Some mutual funds charge regular account fees to manage your account on your behalf.
All of these fees are included in the fund’s expense ratio, which is expressed as a percentage. For example, a fund with a 1% expense ratio charges investors 1% of their balance in the fund per year to cover management fees and other fund expenses.
Examples of No-Load Mutual Funds
There are several no-load mutual funds on the market to choose from. Here are a few real-world examples:
Vanguard Value Index Fund (VVIAX)
You’ll find Vanguard in nearly every best-of list having to do with investment-grade funds. The company is known for some of the lowest average expense ratios and impressive returns. The Vanguard Value Index Fund is no different. The fund focuses on value stocks and comes with a 0.05% expense ratio.
Fidelity Small Cap Value Fund (FCPVX)
The Fidelity Small Cap Value FundFCPVX is also a value-centric fund that’s known for producing compelling returns. Although the returns have been impressive, the expense ratio is somewhat high at 0.98%. Investors must trade higher fees for potentially more impressive returns.
T. Rowe Price Growth Stock Fund (PRGFX)
The T. Rowe Price Growth Stock Fund is an aggressive growth fund that invests in a diversified group of stocks that display strong growth characteristics. The expense ratio on the fund is 0.63%.
Schwab S&P 500 Index Fund (SWPPX)
If you’re looking for a no-load fund but want a heavily diversified portfolio, the Schwab S&P 500 index fund might be a great fit. The fund closely tracks the performance and allocation of the S&P 500. Although there are no load fees, SWPPX does come with a 0.02% expense ratio, making it one of the lowest-cost funds in the industry.
Pros & Cons of No-Load Mutual Funds
Every investment vehicle comes with its own list of pros and cons. No-load mutual funds are no different. Here are some of the most important benefits and drawbacks to consider before making an investment in one of these funds.
No-load funds are prized because they’re perceived to have lower fees than other funds. However, that’s not the only benefit of investing in these funds. Some of the biggest perks to no-load mutual funds include:
- Lower Expenses. Because there are no sales commissions on these investments, no-load funds often have lower fees than other styles of mutual funds. This is important because lower fees result in higher returns in the end.
- Diversification. Most mutual funds offer exposure to a highly diversified portfolio of securities. This heavy diversification protects your investment portfolio from significant declines if one security or a group of securities hits a bump in the road.
- Hands-Off Investing. All investment-grade funds are managed by financial professionals, so there’s far less research and effort involved in investing in funds than in building your own diversified portfolio of stocks and bonds.
- No 12b-1 Fees. Although no-load funds do have their own sets of fees, a true no-load option doesn’t charge 12b-1 fees. These are fees that cover the cost of marketing distribution and other services. FINRA allows mutual funds to charge up to 1% of your total investment for 12b-1 fees, so avoiding them can save you big.
There are plenty of reasons to consider diving into no-load funds, but there are also a few drawbacks to weigh. Some of the biggest include:
- Fees. No-load funds are perceived as a low-cost option by the investing community, and they usually are less expensive than loaded mutual funds. However, in some cases, excessive fees aside from sales commissions make these investments more expensive than you might think. It’s important to compare your options with all fees in mind.
- Standard Portfolios Only. Some specialized portfolios are only available as loaded funds. For example, a fund that targets investments in underdeveloped economies, which requires extensive research for a fund manager to construct, may not have a no-load option. In some cases, a loaded fund is the only way to gain exposure to a specialized mutual fund portfolio you seek.
- Financial Advisor Services. Loaded funds are generally provided through financial advisors or investment advisors that help pick your funds for you. In fact, load fees are used to cover advisor costs. When you invest in no-load funds, you’re taking a DIY approach, which could be like going to court without an attorney.
Should You Invest in No-Load Mutual Funds?
The decision whether to invest in no-load funds largely depends on your goals, needs, and investment experience. You’re a candidate for this investment vehicle if:
- You Want to Pick Your Own Funds. If you’re not interested in an investment advisor picking your funds for you, no-load funds are the way to go because they’re the do-it-yourself option.
- You’re Interested in Heavy Diversification. The vast majority of no-load mutual funds are heavily diversified. However, it’s important to do your research because some funds’ portfolios aren’t quite as diversified as others.
- You’re Relatively New to Investing. As a new investor, you may not be comfortable picking out your own diversified groups of stocks and bonds. When you invest in no-load mutual funds, you can tap into the gains the market has to offer as you learn more about managing your own investment portfolio.
- You’re OK Giving Up Control. With mutual fund investments, fund managers make the investment decisions. You have no say over the exact assets they invest in. Moreover, fund managers retain voting rights for shares held in the fund’s portfolio. So you have to be OK with an inability to vote on important corporate decisions when investing in any investment-grade fund.
No-Load Mutual Fund FAQs
Chances are you have a few questions about no-load mutual funds. That’s perfectly normal when it comes to any financial topic. Find the answers to some of the most commonly asked questions below:
What’s the Difference Between Loaded vs. No-Load Mutual Funds?
The difference between loaded and no-load mutual funds is load fees. Loaded mutual funds charge front-end load fees when you make the investment or back-end load fees when you cash out. Typically front-end load fees are around 5%, but can be as low as 2% or as high as 8.5%. Back-end load fees are typically lower and average around 2.5%.
For example, if you make a $10,000 investment in a mutual fund with a 5% front-end load fee, you’re actually only making a $9,500 investment. The other $500 is used to pay load fees upfront. A back-end load fee may defer the fee until you decide to cash out of the fund, but loaded funds charge sales commissions in one way or another.
What’s the Difference Between Level Load vs. No-Load Mutual Funds?
Unlike no-load funds, level load mutual funds charge load fees. However, these fees are usually smaller and are charged over the life of the investment.
For example, a level load fund with a 1% fee will charge you 1% of your total balance as a load fee every year.
What’s the Difference Between Exchange-Traded Funds (ETFs) and No-Load Mutual Funds?
Like no-load mutual funds, exchange-traded funds have no load fees. Their fees are reflected in expense ratios.
The difference is in how the two financial assets are traded. ETFs are traded freely on major exchanges throughout the trading session. Mutual funds trade once per day at the end of the trading session.
What Are the No-Load Mutual Fund Fees?
As mentioned above, no-load mutual funds aren’t free. The most common fees found on these types of funds include redemption, purchase, account, and exchange fees. You should compare the overall expense ratio of funds you’re interested in when deciding which to dive into.
Why Are There Loads in the First Place?
With so many no-load mutual fund options, you may wonder why there are loads in the first place. These fees are justified as fees for the time investment advisors, brokerages, and other financial professionals take to choose your investments for you. If you’re choosing your own investments, there’s little to no reason to invest in loaded funds.
Ultimately, you invest in an attempt to make money — not to spend it on fees. You should always be aware of the fees you’re going to incur when you make an investment, whether it be in a mutual fund, stock, ETF, cryptocurrency, or any other financial asset.
It’s OK to pay reasonable fees when you make investments. Everyone does. The key is doing your research and making sure the fees you’re paying are being exchanged for something of value.